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Some say that the slump is here, some say that the worst is still to
come. Either way, would investing in short ETFs to offset the losses
in their counterpart ETFs - e.g., SH for SPY, DOG for DIA, etc - be a
sensible move, if not now, when?
TIA
On Nov 17, 11:40 am, Augustine <e...@m...com> wrote:
> Some say that the slump is here, some say that the worst is still to
> come. Either way, would investing in short ETFs to offset the losses
> in their counterpart ETFs - e.g., SH for SPY, DOG for DIA, etc - be a
> sensible move, if not now, when?
I don't know when the liquidity crisis will be over, but I don't think
anyone else does either.
I think it's too late to short, but when the market goes back up, it
might pay to buy some of the short ETFs if you are buying individual
companies in that category.
--
Ron
On Nov 17, 9:40 am, Augustine <e...@m...com> wrote:
> Some say that the slump is here, some say that the worst is still to
> come. Either way, would investing in short ETFs to offset the losses
> in their counterpart ETFs - e.g., SH for SPY, DOG for DIA, etc - be a
> sensible move, if not now, when?
>
> TIA
It would be if you know how.
Augustine wrote:
> Some say that the slump is here, some say that the worst is still to
> come. Either way, would investing in short ETFs to offset the losses
> in their counterpart ETFs - e.g., SH for SPY, DOG for DIA, etc - be a
> sensible move, if not now, when?
It's not sensible, rather it makes no sense! Owning both sides of an
investment (long & short) should always lose you money on that portion
of your portfolio. You'd end up with more money if you instead left that
portion of your portfolio in interest-bearing cash.
Example - if you hold $15k of the long XYZ index fund, $3k of the short
XYZ index fund, you have $12 invested in the XYZ index and $6k earning a
negative return. Putting that $6k instead in some type of investment
that earns interest, and just $12k in the long index XYZ fund,
accomplishes the goal of reducing your exposure to market drops, while
earning more money than the long/short combination.
The reason the $6k loses money is that both your long & short funds bear
investment costs, and miss their goal of tracking the index return. The
best you could do is if these costs/tracking errors were zero - you
would break even, earning a 0% return on your $6k (which would still
lose the horse race against the alternative of just leaving the money in
an interest-bearing investment). But they're not zero, of course, so
it's a formula for losing money.
-Tad
On Nov 17, 9:44 am, Tad Borek <b...@p...net> wrote:
> It's not sensible, rather it makes no sense! Owning both sides of an
> investment (long & short) should always lose you money on that portion
> of your portfolio. You'd end up with more money if you instead left that
> portion of your portfolio in interest-bearing cash.
No, no, no :-) These etfs are not really short, they are inverse.
Owning both becomes sort of a "long straddle", whose net value goes up
whether the market goes up or down! But it goes down if the market is
choppy, like now. The principle is simple - if you have a relatively
straight line rise or fall of the market, your "winner" of the pair
snowballs (compounds) ever larger... while your loser shrinks to a
lesser degree (same % but on an ever smaller base).
I did this on the last crash about 7 years ago. Gains are modest,
expenses are high, and it only works on the down or upward swing -
choppiness kills. Also this can be a way of moving tax burdens to the
next year. Sell your losing one just before the end of the year, and
the winner on the new year, for example.
Mostly a dumb and dangerous practice, but can have its place. Better
to skew the pair to something you expect to win. I have been shorting
oil while longing agriculture, which should have been working but I
bought at bad starting points. Hard to use inverses because rallies
(esp bear rallies) can be so steep.
On Nov 17, 1:44 pm, Tad Borek <b...@p...net> wrote:
>
> It's not sensible, rather it makes no sense! Owning both sides of an
> investment (long & short) should always lose you money on that portion
> of your portfolio. You'd end up with more money if you instead left that
> portion of your portfolio in interest-bearing cash.
I'm sorry if I wasn't clear. I meant trading an index fund like SPY
for its short, SH in order to recover some of the losses. Never
holding both at the same time.
TIA
On Nov 17, 2:15 pm, dumbstruck <d...@g...com> wrote:
> I have been shorting oil while longing agriculture, which should have been working
but I bought at bad starting points.
The overwhelming majority of investors "buy at bad starting points".
It's one of the primary reasons so many individuals and money managers
fail to outperform their indices. It's also why most of the "regulars"
on this group support buying and holding index funds while ignoring
short-term market movements.
On Nov 17, 2:26 pm, Augustine <e...@m...com> wrote:
> I'm sorry if I wasn't clear. I meant trading an index fund like SPY
> for its short, SH in order to recover some of the losses. Never
> holding both at the same time.
How is this different than any other type of market timing? Your
strategy suggest that you believe the market will continue to fall.
How much farther do you think it is going to go? When will it turn
around? Perhaps most worrisome: why didn't you jump on this idea when
the the S&P was at 1565?
As I've already stated, I think passive index investing is the way to
go. But even if I supported active trading, I wouldn't recommend
shorting the market after it has already fallen 46%. There is a good
chance you've already missed all the profit opportunity in this
strategy. Historically (which is not indicative of future results of
course), bear markets have lasted for less than 1.5 years on average
with the longest being 3 years. The average drop has been about 33%.
So it seems we're already pushing the envelope in regards to the
historical averages. I'm also leary of holding positions opposite that
of Mr. Buffett. It's typically an okay rule to live by.
Then again... what do I know. I'm no fortune teller. I just play the
odds, that's all.
dumbstruck wrote:
> No, no, no :-) These etfs are not really short, they are inverse.
> Owning both becomes sort of a "long straddle", whose net value goes up
> whether the market goes up or down!
The fund's prospectus and Statement of Additional Information indicate
otherwise. E.g. the SAI chart "Estimated Fund Return Over One Year When
the Fund Objective is to Seek Daily Investment Results, Before Fees and
Expenses, that Correspond to the Inverse of the Daily Performance of an
Index." Before fees and expenses, and assuming no tracking errors, it's
a money pump out of your pocket in a wide range of index returns and
volatilities. In high volatility it's especially dramatic as variance
drain is amplified. Add the chart (inverse) returns to the index
returns and you'll see many, quite routine, scenarios with combined losses.
But really it's worse...add in costs, plus tracking error, plus all the
flakiness that is likely to result if these kinds of things are traded
intraday with a lot of creation/redemption activity, and that chart will
have more red in reality.
Point being long-ETF plus inverse-ETF might at times have a net value
that rises over time, but that's an uncommon outcome (even a long
straddle is a money pump out unless you peg the strike prices right).
The stated goal is the inverse of today's return, not longer-term. I
think many investors who don't read the prospectuses are assuming that
an inverse fund will return +10% when the market drops -10%, over a
longer period - like a year. But in a high volatility market you might
instead be down say -7% (or more)...both your long and inverse are in
the hole and the inverse is -17% from where a casual buyer might think
it should be. It will be interesting to see the end of year numbers
because I can't imagine how to run this kind of strategy in a 70-VIX
kind of market.
-Tad
On Nov 18, 9:46 am, Tad Borek <b...@p...net> wrote:
> think many investors who don't read the prospectuses are assuming that
> an inverse fund will return +10% when the market drops -10%, over a
> longer period - like a year. But in a high volatility market you might
I would hope any investor sanity checks both what they read and their
assumptions with a graph, like http://finance.yahoo.com/q/bc?t=3m&s=EUM&l=off&z=l&q
=l&c=eem%2Cdia%2Cdog+dig+dug
Get some continuous reality data which doesn't get chopped into
arbitrary time periods. Who can get everything out of a prospectus
these days, when they are so evasive in not describing the index at
all and crying wolf on every possible thing indiscriminately (both for
legal reasons I reckon).
If the graph doesn't get garbled due to Yahoo flip flopping between
the old and new graph syntax, it should show how 3 long funds graph
against their inverse twins. You would hope for roughly a mirror
image, and can draw an imaginary line between them that is hopefully
fairly level such as sagging by a couple percent per year.
This DOW case is well behaved (dia vs dog), but emerging markets are
more saggy (eem vs eum) and ultra oil/gas is quite a disaster (dig vs
dug). Not sure if the greater sags come from being on less volume
indices, more volatile ones, or from 2x leverage types. In the
previous crash I think broad 2x inverse funds were pretty well behaved
during the long slump.
I hardly hedged with inverses at all in this crash, unlike the last
one. A little EUM, and just when I enjoyed that enormous spike in DUG
(doubling in a few days mid Oct) I got greedy and bought more which
looks to be a disaster instead the selling signal it was. Due to being
in IRA, I won't even benefit from any tax loss, but note how you can
(with risk) use these in pairs to relocate losses and gains between
this year and next.
Not advocating using these inverses, but to discuss how they can
actually work... you can make money holding both on nearly straight
line moves, minus the waste. It's rare when you can expect this, but
can work in an early pause in a melt down where I expect either a melt
up or further melt down (slope down or V recovery rather than U) as I
did mid plummet in the tech crash. At that time I posted the good
resulting combined share values to a sceptical forum audience. I
intuited that scenario more recently when China had about half
crashed, but didn't think about straddling it - bet it would have
worked fine.
There should be little need for a nanny response about not doing what
I describe except in extreme circumstances - I just meant to think
about some consequences of the techniques brought up here rather than
to advocate...
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